News Archive

12 June 2006

Report: MiFID - Not a One-Time Compliance Cost, but a Fundamental Change to the Financial Markets

- Regulation will affect business models as well as operations of sell- and buy-side firms
- Market participants must prepare for impact of fragmentation of liquidity
- Silo-based systems will struggle to handle reporting requirements and multiasset trading

London, 12th June 2006: Quod Financial, a leading supplier of 3rd generation, multi-asset trading and order management systems for sell- and buy-side financial institutions, says that the EU’s Markets in Financial Instruments Directive (MiFID) will require all market participants to make fundamental changes to their trading operations. As such, MiFID presents a long-term business issue beyond the initial cost of compliance, requiring significant long-term planning and investment by both the buy- and sell-side.

In a new white paper, ‘A Study of Possible Future Equilibriums of Trading and Technology Investment’, Quod Financial asserts that compliance is only the first stage of MiFID’s impact and that sell-side firms in particular must have plans for each stage of the consequences of the directive, which is due to come into force in November 2007. Whilst the MiFID debate has largely focused on the costs of compliance, Quod’s white paper highlights future likely scenarios and discusses the impact of liquidity fragmentation and subsequent consolidation. The report also states that buy-side firms should not underestimate the investment needed to meet new reporting requirements and to supply accurate transaction cost analyses to clients.

Widely regarded as the most significant EU legislation for investment intermediaries and financial markets since 1995’s Investment Services Directive (ISD), MiFID paves the way for the decentralisation of European equity trading away from exchanges to new electronic trading venues. While MiFID offers banks and broker-dealers the opportunity to develop new revenue streams by ‘internalising’ the prices of equities and other securities, investment managers must demonstrate best execution in their choice of trading venue. As such, both sell- and buy-side firms are already focusing on overhauling trade reporting processes.

Mickaël Rouillère, report author and Chief Technology Officer at Quod Financial, says the ‘rebuilding’ of price transparency and liquidity in a market fragmented by the introduction of new trading venues poses a large challenge to all market participants. “Market data and reporting will be the key issues ahead of November 2007, but the industry must also plan ahead. The degree of complexity, the acceleration in execution speed and the amount of data being handled and reported are beyond current systems. The shift in the market will require a new generation of technology promoted by the most innovative of emerging vendors. These will displace incumbents to become the new market leaders of the post-MiFID environment.”

“MiFID is not only about compliance and it should not be viewed as yet another announced Doomsday like the Y2K bug!” says Ali Pichvai, Managing Director of Quod Financial. “MiFID creates new business opportunities for the players that will seize the opportunity. But on the other hand, could prove to be a nightmare for the ones who delay their response.”